Ch-2 INDIAN ECONOMY (1950-1990)

INTRODUCTION
 On the eve of independence, Indian economy was completely undeveloped.
 After 200 years of British rule and their exploitation policies, India finally got its freedom on 15 august
1945.
 Now it is necessary to reconstruct the backward and stagnant economy into a developed economy.
 Therefore, the most important task before the Government of independent India was to decide the
type of ‘Economic System’, most suitable for India, a system which would promote the welfare of all,
rather than a few.
 Economic System refers to an arrangement by which central problems of an economy are solved.
CENTRAL PROBLEMS OF AN ECONOMY
The three major central problems of an economy are:
 What to Produce: It involves deciding the final combination of goods and services to be produced.
 How to produce: It involves deciding the technique of production, i.e. whether selected goods are
produced with labour intensive technique or capital intensive technique.
 For whom to produce: It involves deciding the distribution of output among people i.e. category of
people who will ultimately consume the goods.
TYPES OF ECONOMIC SYSTEMS
1. Capitalist Economy:
 A capitalist economy is the one in which the means of production are owned, controlled and operated
by private sector.
 Production is mainly done for earning profit.
 Central problems are solved through the market forces of demand and supply.
2. Socialist Economy:
 A socialist economy is the one in which the means of production are owned, controlled and operated
by the government.
 In a socialist society, the government decides what to produce in accordance with the need of the
society.
 Distribution is supposed to be based on what people need and not on what they can afford to
purchase.
3. Mixed Economy:
 A mixed economy system refers to a system in which the public sector and the private sector are
allotted their respective roles for solving the central problems of the economy.
 In such economy, the government and the market together answer 3 questions of central problem of
the economy.
 The private sector provides whatever goods and services, it can produce well, and the government
provides essential goods and services, which the market fails to do.
 India adopted Mixed Economy as it combines the best features of both socialism and capitalism.
 In this view, India would be a socialist society, with a strong public sector, but also with private
property and democracy.
ECONOMIC PLANNING
 After adopting the ‘Mixed Economic System’, the development of Indian economy, it was necessary for
the government to ‘plan’ for the economy, known as Economic Planning.
 Economic planning can be defined as making major economic decisions by the conscious decision of a
determinate authority, on the basis of a comprehensive survey of the economy as a whole.
 The Industrial Policy resolution of 1948 and the Directive principles of the Indian Constitution assigned
a leading role to the public sector.
1
 To make economic planning effective, the government of India set up Planning Commission in 1950,
with the Prime Minister as the Chairman.
 The purpose of the Commission was to carefully assess the human and physical resources of the
country and to prepare the Plans for the effective use of resources.
 The Planning Commission fixed the planning period at five years, which began the era of ‘Five Year
Plans’.

GOALS OF FIVE YEAR PLANS

 Concerned with removal of economic backwardness of the country and to make India a developed
economy.
 Ensure that the weaker sections of the population benefit from the economic progress of the country.
 The first five year plan was launched for a period starting from 1 st April, 1951 and ending on 31st March,
1956.
 The basic goals are:
1. GROWTH:
 Growth refers to increase in the country’s capacity to produce the output of goods and services within
the country.
 The most important objective of Indian Plans is the rapid growth in national income and per capita
income.
 A good indicator of economic growth, in the language of economics, is steady increase in GDP. GDP
refers to market value of all the final goods and services produced in the country during a period of one
year.
 Increase in availability of goods and services enables people to enjoy a more rich and varied life.
 GDP of a country is derived from the different sectors of the economy. The contribution of each sector
makes up the structural composition of the economy.
2. MODERNISATION:
 Earlier, India was very deficient in technical know-how.
 Indian planner has recognized that application of science and technology in production raises the
output level and the pace of economic growth. For example- a factory can increase output by using a
new type of machine.
 It also requires a change in social outlook, such as gender empowerment or providing equal right to
women.
3. Self-reliance:
 The third major objective is to make the economy self- reliant which mean overcoming the need of
external assistance or development through domestic resources.
 To promote economic growth and modernization, the five year plan stressed on the use of own
resources, in order to reduce dependence on foreign countries.
 It was feared that dependence on imported food supplies, foreign technology and foreign capital may
increase foreign interference in the policies of our country.
4. Equity:
 It is important to ensure that the benefits of economic prosperity are availed by all section of the
economy. So in addition to growth, modernization and self-reliance, equity is also important.
 It aims to raise the standard of living of all people and promote social justice. The objective of social
justice has three dimension:
1. To improve standard of living of weaker sections of the population;
2. To reduce income inequalities;
3. To reduce regional or state inequalities.

2
AGRICULTURAL DEVELOPMENT
 At the time of independence, the land tenure system was characterized by intermediaries who merely
collected rent from the actual tillers of the soil.
 The low productivity of the agricultural sector forced India to import food from USA.
 It accounted for the largest share of workforce with approx 70-75%. So agricultural development was
focused right from the First Five Year Plan.
 The measures undertaken to promote the growth in the agricultural sector can be broadly categorized
as ‘Land Reforms’ and ‘Green Revolution’.

LAND REFORMS:
 Introduced by various underdeveloped and developing countries, for attaining a rational land
distribution pattern and viable farming structure.
 Equity in agriculture called for land reform, which primarily refers to change in the ownership of
landholdings.
 Various steps were taken by the Indian government to abolish intermediaries and to make tillers, the
owners of land.
 The idea behind this step was that ownership of land would give incentives to the actual tillers to make
improvements, provided, sufficient capital was made available to them.
OBJECTIVE OF LAND REFORM:
 More rational use of scare land resources.
 Raise the production level by motivating farmers and by giving incentives
 Remove exploitation of poor farmers by redistributing agriculture land in favour of less privileged class
of farmers.
 Improving terms and conditions for possessing land for cultivation by actual tillers, through abolition of
intermediaries.
 Promote social welfare by distributing land to landless cultivators
 Attain planned development of agricultural sector on long-term basis.
 Raise standard of living of the rural poor.
LAND CEILING:
 It refers to fixing the specified limit of land, which could be owned by an individual. Beyond the
specified limit, all lands belonging to a particular person would be taken over by the Government and
then the same be allotted to the landless cultivators and small farmers.
 It helped to promote equity in the agriculture sector.
 The main aim was to reduce the concentration of land ownership in few hands. The abolition of
intermediaries meant that some 200lakh tenant came into direct contact with the government.
 But the goal of equity was not fully served by abolition of intermediaries because of following reasons:
1. In some areas the former zamindars continued to own large areas of land by making use of some
loopholes in the legislation.
2. Tenants were evicted and zamindars claimed to be self-cultivators.
3. Even after getting the ownership of land, the poorest of the agricultural labourers did not benefit from
land reforms.
4. It was challenged by the big landlords, which delayed its implementation.
Land reform was successful in Kerala and West Bengal because governments of these states were
committed to the policy of land reforms.
GREEN REVOLUTION:
 At the time of independence, about 75% of the country’s population was dependent on agriculture.

3
  Due to outdated technology and the absence of required infrastructure, the productivity in the
agriculture sector was very low. It dependent only on monsoon.
 The stagnation in agriculture during the colonial rule was permanently broken by the ‘Green
Revolution’.
 It resulted in the large increase in production of food grains due to use of high yielding variety seeds
(HYV), especially for wheat and rice.
 Agricultural revolution occurred primarily due to the miracle of new wonder seeds, which raised
agricultural yield per acre to incredible heights. These seeds can be used in those places where there
are adequate facilities for drainage and water supply.
 To produce best result, these seeds need to be combined with heavy doses of chemical fertilizers.
 To derive benefit from HYV seeds, farmers need reliable irrigation facilities and financial resources, to
purchase fertilizers and pesticide.
 Indian economy experienced the success of green revolution in two phases:
1. In the first phase (Mid 60s-70s), the use of HYV seeds was restricted to more affluent states like Punjab,
Andhra Prasad, Tamil Nadu. It benefitted only wheat growing region.
2. In the second phase (Mid 70s-80s), the HYV technology spread to a larger number of states and
benefited more variety of crops.
 The spread of Green Revolution technology enabled India to achieve self- sufficiency in food grains.
India was no longer at the mercy of America, or any other nation, for the food requirements.
ACHIEVEMENTS:
 It resulted in manifold increase in food production.
 Use of HYV seeds brought about sharp rise in the yield of land in respect of food grains.
 The adoption of this new technology increased the income of farmers. Peasants invested the increased
income for the improvement of their farm organizations.
 It helped in the creation of employment potential and absorption of excess labour force in the rural
areas.
 Agriculture became not only living farming but also commercial farming. Green revolution resulted in
‘Marketable Surplus’ which refers to that part of agricultural produce which is sold in the market by the
farmers after meeting their own consumption.
 There was also favorable impact of green revolution on the industrial development.
 It enabled India to achieve self-sufficiency in food grains.
SHORTCOMINGS:
 It is confined to limited crops like wheat, rice, jowar, bajra.
 The new strategy has benefitted rich farmers, who could spend huge amount on fertilizers, pesticides.
As a result, small farmers were in a disadvantageous position as compared to rich farmers in the use of
new strategy.
 It increased the income inequalities in the villages. Rich farmers earned lot of income as compared to
poor farmers.
 Increase in food production has taken place in some selected areas which widened the regional
inequalities.
 The HYV crops were more prone to attack by pests and the small farmers, who adopted this
technology, could lose everything in the pest attack.
DEBATE OVER SUBSIDIES:
 Subsidy means that the farmers get inputs at prices lower than the market prices.
 It was necessary to grant subsidies, to provide an incentive for adoption of the new HYV technology.
 The government of India has always provided massive subsidies to farmers, to increase production and
productivity in agriculture.
4
 In favour of subsidies:
 Should continue with agriculture subsidies as farming in India continues to be a risky business.
 Majority of the farmers are very poor and will not be able to afford the required inputs without the
subsidies.
 Eliminating subsidies will increase the income inequality between rich and poor farmers.
Against the subsidies:
 Subsidies were granted by the Government to provide an incentive for adoption of the new HYV
technology. So, after the wide acceptance of technology, subsidies should be phased out as their
purpose has been served.
 Subsidies do not benefit the poor and small farmers as benefits of substantial amount of subsidy go to
fertilizers industry and prosperous farmers.
CRITICAL APPRAISAL OF AGRICULTURAL DEVELOPMENT (1950-1990)
 Between 1950 and 1990, there had been substantial increase in the agricultural productivity. India
became self- sufficient in food production. Land Reforms resulted in abolition of zamindari system.
 The Proportion of GDP between 1950 and 1990 contributed by agriculture declined but not the
population depending on it.
 Around 65% of the country’s population continued to be employed in agriculture till 1990. The
involvement of such a large proportion of the population in agriculture was regarded as the important
failure of policies followed during 1950-1990.
INDUSTRIAL DEVELOPMENT
 In the pre-British period, India was industrially advanced country. But the British rule systematically
destroyed the Indian industries.
 At the time, no serious efforts were made by the Britishers to develop industries, especially basic and
heavy industries.
 As a result, India had a weak industrial base, poorly developed infrastructure and a stagnant economy.
Textile and jute industries were mostly developed in India.
 There was two well-managed iron and steel firms: one in Jamshedpur and other in Kolkata. So there
was need to expand the industrial base with variety of industries.

ROLE OF PUBLIC SECTOR

At the time of independence, the policy maker was to decide the pattern of ownership of industries.
The aim was to determine the role of the government and the private sector in the industrial
development. There was need for a leading role of the public sector due to the following reasons:
1. Private entrepreneurs did not have the capital to undertake investment in industrial ventures. Tatas
and Birlas were the only well known private entrepreneurs. So the Government had to make
investment through Public Sector Undertakings.
2. The Indian market was not big enough to encourage private industrialists to undertake major projects,
even if they had capital to do so.
3. The objective of equity and social welfare of the Government could be achieved only through the direct
participation of the state in the process of industrialization.
As a result, state had complete control over those industries that were vital for the economy.
The policies of the private sector had to be complementary to those of the public sector, with public
sector leading the way.

INDUSTRIAL POLICY RESOLUTION 1956 (IRP)

5
 Industrial policy is a comprehensive package of policy measures which covers various issues connected
with different industrial enterprises of the country.
 It is essential for devising various procedures, principles, rules and regulations for controlling industrial
enterprise of the country.
 Indian economy had to face a series of economic and political changes, which necessitated the
formulation of a fresh industrial policy for the country.
 So, on April 30, 1956, a second Industrial Policy resolution was adopted in India. Following were the
principal elements of IRP-1956.
1. Three-fold Classification of Industries: Industries were classified into three categories:
I. Those which would be established and developed exclusively as public sector enterprises.
II. Those which could be established both as the private and public sector enterprises.
III. All industries other than above categories were left to private sector.
2. Industrial licensing: There was category of industry left to the private sector, the sector was kept under
state control through the system of licenses.
I. No new industry was allowed unless a license was obtained from the government.
II. This policy was used for promoting industry in backward regions.
III. In addition, units were given certain concessions such as tax benefits and electricity at a lower tariff.
IV. The purpose was to promote regional equality.
V. License to expand and diversify production was given only if the government was convinced that the
economy required a larger quantity of goods.
3. Small-Scale Industry:
 Small scale industry of various types together occupies an important place in the country’s economy.
 IPR offered a special favour for the development of small scale industries in India.
 A ‘Small Scale Industry’ is defined with reference to the maximum investment allowed on the assets of
a unit.
 Initially the fixed capital investment limit of the small scale units was restricted to Rs. 5 lakhs but at
present it is increase to rupees one crore.
In favour of small scale industries:
 Small-Scale industries are more labour intensive so provides employment.
 It ensures more equitable distribution of national income and wealth.
 Small scale industries are playing an important role in dispersing the industrial units of the country in
the various parts of the country.
 These industries maintain better industrial relation between employers and employees, which reduce
the frequency of industrial disputes.
 They were also given concessions, such as lower excise duty and bank loans at lower interest rates.
TRADE POLICY: IMPORT SUBSTITUTION
 In the first seven plans trade was characterized by an inward looking Trade Strategy which was known
as “Import Substitution”.
 It refers to a policy of replacement or substitution of imports by domestic production.
 The basic aim was to protect domestic industries from foreign competition.
 The main objective was saving of precious foreign exchange and achieving self-reliance.
 For example- instead of importing vehicles made in foreign countries, domestic industries would be
encouraged to produce them in India itself.
 Protection on import took two forms:
1. Tariff refers to taxes levied on imported goods. The basic aim for imposing heavy duty on imported
goods was to make them more expensive and discourage their use.
2. Quotas refer to fixing the maximum limits on the imports of a commodity by a domestic producer.

6
 The tariff on imported goods and fixation of quotas helped in restricting the level of imports. As a
result, the domestic firms could expand without fear of competition from the foreign market.
Reason for Import Substitution:
1. The policy of protection is based on the notion that industries of developing countries like India are not
in a position to compete against goods produced by more developed economies. With protection they
will be able to compete in the due course of time.
2. Restriction on import was necessary as there was a risk of drain of foreign exchange reserves on the
import of luxury goods.
CRITICAL APPRAISAL OF INDUSTRIAL DEVELOPMENT (1950-1990)
The achievements of India’s industrial sector during the first seven plans are impressive indeed.
1. The proportion of GDP contributed by the industrial sector increased in the period from 11.8% to
24.6%.
2. The industrial sector became well diversified by 1990, largely due to the public sector. It was no longer
restricted to cotton textiles and jute.
3. The promotion of small scale industries gave opportunities to people with small capital to get into
business.
4. Protection from foreign competition enabled the development of indigenous industries in the area of
electronics and automobile sector, which otherwise could not have developed.
5. Licensing policy helped the government to monitor and control the industrial production. However
excessive regulation by the government created two difficulties: misuse and time consuming.
6. Public sector made a remarkable contribution by creating a strong industrial base, developing
infrastructure and promoting development of backward areas. However monopoly of public sector in
production of certain goods and services was criticized by many scholars.